Cryptocurrency "prosecution-style regulation" did not stop during Trump's administration

Author: Project Glitch, Mike Orcutt Translator: Block unicorn

The Trump administration's approach to handling important crypto cases is not much different from that of the Biden administration.

Donald Trump promised to make the United States the "crypto capital of the world," and there are many actions that seem to prove that he is fulfilling his promise. For example, he appointed openly "pro-crypto" officials to the executive branch, such as Treasury Secretary Scott Bessant and new Securities and Exchange Commission Chairman Paul Atkins. His party controls both houses of Congress and has drafted legislation that will greatly benefit the crypto industry. Of course, he is also the proud owner of Trump-branded meme coins and stablecoins.

However, the most extreme legal threats to cryptocurrencies during the Biden administration - which many industry insiders believe is the reason why they supported Trump in last year's election - remain the same.

The most prominent example is the case of Tornado Cash, an Ethereum-based privacy tool. Advocates had hoped that the Trump administration would completely change its stance on Tornado Cash, especially that the Justice Department would drop its case against one of its developers, Roman Storm. That hope was bolstered when Trump’s deputy attorney general, Todd Blanche, issued a memo in April declaring that the Trump Justice Department would end his predecessor’s “reckless strategy of prosecution to promote regulation,” echoing a common criticism of the Biden administration by crypto advocates.

Nevertheless, last month, federal prosecutors in the Southern District of New York revealed in a letter to the judge overseeing the case that they still planned to pursue Storm on nearly all charges.

Combined with some subtle legal maneuvers when the Treasury Department removed the Tornado Cash software from its sanctions list in March, it seems that the new administration has no immediate plans to quell the fear of prosecution that has plagued many crypto developers for nearly three years.

A small victory

The letter from prosecutors in the Southern District of New York did make one concession that may seem small in Storm's case but is significant in the broader legal conflict. The letter notified the judge that federal prosecutors would drop part of the charge that Storm operated an "unlicensed money transmitting business."

Storm and another developer, Roman Semenov, were indicted in 2023. The indictment alleged that North Korean hackers used Tornado Cash to launder hundreds of millions of dollars in cryptocurrency stolen from the video game Axie Infinity. The indictment charged Storm and Semenov with conspiracy to launder money, conspiracy to violate sanctions against North Korea, and conspiracy to operate an unlicensed money transmitting business. Storm was arrested in August 2023 and is scheduled to go on trial in July of this year. Semenov has not been arrested to date.

The unlicensed money transmitter charge is the one that has angered the crypto policy community the most, and has left many in the industry feeling betrayed by the government.

Under the U.S. Bank Secrecy Act (BSA), money transmitters are required to register with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). In 2019, FinCEN issued guidance that was widely interpreted to mean that to qualify as a money transmitter, one must have “complete and independent control” of user funds.

The way Tornado Cash’s smart contracts operate ensures that only users control the funds. Therefore, the 2019 FinCEN guidance implied that Tornado Cash did not need to register.

But last spring, Justice Department prosecutors argued the opposite in a brief filed with the court: Even if you don’t control user funds, you can be considered a money transmitter. Shockingly, the judge in the case agreed with the Justice Department.

This clearly creates a "rule of law problem," said Peter Van Valkenburgh, executive director of Coin Center, a policy research and advocacy group. "It seems to me that if the regulator says from the outset that a license is not required, no one should be charged for failing to obtain one," he said at Project Glitch's Washington Privacy Summit last October.

The Justice Department appears to have changed its mind. Last month, it announced that it would no longer argue that Storm had violated the law by not registering with FinCEN. On the one hand, Van Valkenburgh called that "big news." But on the other hand, it was the only part of the charge that the government decided to back down on after the Branch memo was released. Although the Justice Department acknowledged that no registration was required, it still charged Storm with operating an unlicensed money transmitting business. Prosecutors cited another section of the law, saying that even if a license was not required, because the transactions in question "involved the movement or transmission of funds," Storm allegedly knew that the funds were criminally derived.

Confused? You're not the only one. “It just doesn’t make sense,” Van Valkenburg said this week during a panel discussion at PGP* for Crypto, a monthly gathering of crypto policy insiders in Washington, D.C. “If you’re going to convict them of unlicensed money transmission but nobody’s asking them to get a license — how crazy is that?”

The Justice Department used the same argument in a separate criminal case against Keonne Rodriguez and William Lonergan Hill, developers of the bitcoin privacy tool Samourai Wallet, dropping charges that they failed to obtain a license but continuing to charge them with conspiracy to operate an unlicensed money transmission business. The case recently highlighted the divergence between FinCEN and the Justice Department over what constitutes a money transmission business. The defense team released a summary of a call between federal prosecutors and two FinCEN employees, in which FinCEN representatives argued that because Samourai didn’t control user funds, it “strongly suggested” it wasn’t a money transmission business.

The persistence of these charges dashed hopes that Branch’s memo would signal a radical change of course at the Justice Department. Amanda Tuminelli, executive director and chief legal officer of the DeFi Education Fund, a policy advocacy group in Washington, D.C., said on a panel at PGP* for Crypto that parts of the memo are good for the industry. “I think the spirit of the memo is good,” she said. But in the high-stakes conflict over what constitutes a money transmitter business, “it doesn’t resolve anything.”

Tuminelli believes Congress should amend the criminal code to “completely eliminate the possibility of it being misinterpreted again” by making it clear that criminal code provisions don’t apply to software developers who don’t control or custody customer funds.

The North Korea factor

There’s also the matter of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) imposing sanctions on Tornado Cash in 2022. Coin Center and others have sued OFAC, arguing it has no authority to sanction decentralized software. The cryptocurrency industry launched a fierce lawsuit against the government in one of the cases last November. The Fifth Circuit Court of Appeals ruled that OFAC did not have the authority to sanction Tornado Cash’s “immutable” smart contracts because they were not “property.” In March, the Treasury Department removed the smart contracts from its sanctions list.

But some important signals suggest that the government is not ready to back down on this issue.

First, Michael Mosier, co-founder of the Arktouros law firm and former OFAC official and FinCEN director, noted that the Treasury Department did not characterize the action as an admission of error. Instead, the agency said it “decided to remove economic sanctions at its discretion.” Mosier noted in a recent speech in Washington, D.C. that this was an “extremely prudent response” to the Fifth Circuit’s ruling. The agency may be preparing further action.

The second important signal is how the government handles the sanctioned Tornado Cash developer, Russian citizen Roman Semenov.

Some backstory: OFAC initially sanctioned the Tornado Cash software under President Obama’s 2015 executive order targeting cybercrime. In November 2022, OFAC reimposed sanctions, adding a designation based on another Obama-era executive order aimed at preventing North Korea from funding its nuclear weapons program. In August 2023, OFAC added developer Roman Semenov to the sanctions list under both executive orders.

In March, OFAC rescinded cybercrime and North Korea-related sanctions on Tornado Cash, but kept Semenov on the sanctions list under the North Korea executive order.

“The enforcement authority against North Korean programs is much broader than the more general cybersecurity order,” Mosier explained, meaning the government would have an easier time defending such actions in court. Mosier believes the Treasury Department's move to remove Semenov's cyber sanctions label while keeping him on the North Korea sanctions list is sending a message. "Removing the cyber sanctions label, keeping the North Korea sanctions label, resulted in his sanctions being publicly released in the same press release that announced they were removing the (Tornado Cash) address sanctions," he said. "It's a strong signal to Congress and developers around the world that: 'We are not leaving this space.'"

Despite Trump's love of cryptocurrencies, his administration appears to share the Biden administration's opposition to certain types of cryptocurrencies.